Debt crisis a historic challenge to European unity

The latest backdrop for European financial crisis talks was Wroclaw, Poland - or Breslau, as the picturesque city on the Oder River is still known in Germany.

As Europe’s finance chiefs bounce from meeting to meeting trying to hash out a strategy to contain their debt troubles, the city’s history may serve as a reminder of what is at stake: a hard-won European unity that followed centuries of ravaging wars and has slowly enveloped the former Communist states in the continent’s east.

Fears of a sovereign default have already forced three countries – Greece, Portugal and Ireland - into multibillion euro bailouts and are now sending ripples though the global economy and world markets.

But the European debt crisis is about much more than the euro currency that 17 of its nations use.

“We should all be aware what the stake of the game is. Because the game is not only about the well-being of this generation or the next generation, but it goes without saying we’re also fighting for the safety of this and future generations,” Polish Finance Minister Jacek Rostowski said after yet another gathering that failed to convince markets that Greece won’t default on its massive debts and big economies like Italy and Spain can effectively be ring-fenced from the current turmoil.

In Rostowski’s mind it is clear.

“If the eurozone were to split, it is difficult to imagine for the European Union not to split as well,” he says.”It is difficult to imagine Europe to be as safe as it is now without the European Union.”

A quick look at Wroclaw’s history illustrates what the minister is referring to. The city – spread out over several river islands and sometimes referred to as the Venice of the North – changed nationality multiple times in the past 400 years, moving between Bohemia, Austria, Poland and Germany and was once even occupied by Napoleon’s troops.

In 1945, Breslau was one of the last vestiges of Nazi Germany. When the city finally fell to Soviet troops after a months-long siege, tens of thousands of its inhabitants had died. The remaining Germans then had to leave as Breslau once again became Wroclaw and soon fell under Polish Communist rule.

Today, Poland’s currency is not the euro and after years of working toward joining the currency union, the country has declared that, right now, dropping the zloty and adopting the euro is not worth the risk.

That announcement shows that Europe at a critical juncture. Either expansion stops and some struggling members, like Greece, may even have to drop out, or its sovereign nation states embrace much closer union, where a central authority rules over taxes and spending, and where national bond issues may be backed by all euro countries.

“We have not yet arrived where a full currency union should be and the crisis has shown it is not enough to have common rules, they need to be enforced,” said Luxembourg Finance Minister Luc Frieden. “And everything that can contribute to that is absolutely necessary.”

Frieden’s counterparts said Friday night they had just taken a big step in that direction. After a year of infighting, the 27 finance chiefs signed off on tougher budget rules that make it easier to punish over-spenders and raise red flags when a government risks breaking the bloc’s limits on debts and deficits.

But – most states, economists and the European Central Bank now agree – the new rules are far from enough for the 17-nation eurozone.

Luxembourg, Italy and Belgium want joint eurobonds – debt guaranteed by the entire eurozone, not just individual nations. The Netherlands have proposed a powerful budget czar who would scrutinize over-spenders and could ultimately kick stragglers out of the currency union. And European Central Bank head Jean-Claude Trichet wants a single finance minister for the whole eurozone.

But the yearlong struggle over the most recent spending regulation indicates how difficult it will be to implement any of these proposals, which many analysts say may be the only way of keeping the euro alive.

Germany has ruled out eurobonds, and France is so wary of submitting to financial sanctions that it insisted on complicated voting procedures that still allow states to stop punishments proposed by the EU’s executive Commission.

While the recriminations and disagreements that have characterized Europe’s bailout discussions over the past two years are far from the wars that previously rocked the continent, they have boosted far-right, euro-skeptic parties in several richer states and triggered violent anti-austerity demonstrations in the poorer ones.

In any case, economists warn, a failure of the euro could push Europe, and with it many other parts of the world, into another recession, hurt global trade and eliminate thousands of jobs.

For now, Europe’s finance chiefs insist, a failure of the euro, or even one of the euro states, is not an option and the strategy of rescue loans and painful austerity measures will continue.

And in the medium and long-term, Frieden insists, “More is possible and more is necessary.”

“If you have a currency union, you certainly also need more elements of a political and of an economic union. That was clear from the outset when we started this project some 10, 15 years ago,” said the Luxembourg finance minister whose name Frieden is the German word for peace.